Understanding
Cash Flow
Statement
01
The Cash Flow Statement is a financial
report that reveals how cash moves in
and out of a business. Let's dive deeper
into its three crucial sections:
1️⃣ Operating Activities: Cash flow from
day-to-day operations.
2️⃣ Investing Activities: Cash flow from
investments like buying/selling assets.
3️⃣ Financing Activities: Cash flow from
activities like raising capital or paying
dividends.
02
Why is Cash Flow
Statement Important?
Unlike the Income Statement and
Balance Sheet, which focus on profits
and assets, the Cash Flow Statement
emphasizes actual cash movement!
It's a reality check, ensuring a
company's profits aren't just on paper,
but they turn into real money!
03
Interpretation of A
Cash Flow Statement
The cash flow statement reveals a
company's financial health.
Positive operating cash flows from
core business indicate a healthy, self-
sustaining company.
Negative investing and financing
cash flows often happen as
companies invest and repay debt.
04
Over time, operating cash flows
should cover investments and
obligations.
Consistently low operating cash flows
with positive investing cash flows
may signal trouble as the company
sells assets to fund operations.
Similarly, consistently positive
financing cash flows with low
operating cash flows can show
inefficiency and poor management.
05
Cash Flows from
Operations
The first part of the cash flow statement
shows cash flows from operating
activities (CFO) related to the company's
core business. It starts with net income
and adjusts non-cash items, like accounts
receivable. Positive CFO indicates
healthy growth, while negative CFO may
require external financing for expansion.
06 Cash Flows from
Investing
The second part of the cash flow
statement, cash flows from investing
activities (CFI), involves investment gains
and losses, as well as cash spent on
property and equipment (CapEx).
Increased CapEx may reduce cash flow
but signifies investment in future growth.
Positive cash flow in this section is good,
yet investors prefer cash flow from core
business operations. Companies can also
generate cash flow here by selling
equipment or property.
07
Cash Flows from
Financing
The last part of the cash flow statement is
cash flows from financing activities (CFF).
It shows cash flow related to business
financing, involving owners and creditors
through debt or equity. It highlights
money paid out for dividends or share
buybacks and reveals how the company
raises cash for growth. Positive CFF
means more money coming in, while
negative CFF indicates debt payments or
dividend/stock buybacks.
08
Analyzing Cash Flow
Ratios
1) Operating Cash Flow Ratio: Operating
Cash Flow / Current Liabilities.
The operating cash flow ratio
assesses how many times a company
can settle its current debts using cash
generated during the same period.
09
2) Cash Flow to Debt Ratio: Operating
Cash Flow / Total Debt.
It is a coverage ratio, that calculates
the time it would take for a company
to fully repay its debt by utilizing all its
cash flow for debt repayment.
3) Free Cash Flow: The cash available
after expenses and investments.
4) CFO/EBITDA Ratio: It shows what
percentage of profit that is being
converted into cash.
10
Decoding Financing
Activities
Debt Issuance ➡️ Borrowing money
for business expansion or operations.
Equity Issuance ➡️ Selling shares to
raise capital.
Dividends and Share Buybacks ➡️
Ways to reward shareholders and
boost stock value.
11
Identifying Red Flags
Increasing Accounts Receivable ➡️
Could signal trouble in collecting
payments.
Declining Cash Flow from Operations
➡️ The core business might be
struggling.
Frequent Reliance on Financing ➡️
Possible dependency on debt or
equity issuance.
12
Interpreting Investing
Activities
Capital Expenditures ➡️ Investments in
fixed assets like property, equipment, or
technology.
➡️
Acquisitions and Disposals Assess the
wisdom of business expansions or
divestitures.
➡️
Research and Development Insights
into innovation and future growth
prospects.
13
Putting It All Together
1) Consistency Matters: Analyze trends
over multiple periods for better insights.
2) Compare with Competitors:
Benchmarking helps identify industry
leaders.
3) Diving into Disclosures: Check notes to
financial statements for crucial details.
Nisha Pobaru
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